When it comes to passing down wealth while keeping control, trusts have long been the go-to option. However, over the past decade, Family Investment Companies (FICs) have emerged as a powerful alternative, offering both estate planning benefits and tax efficiency.

But what exactly is a Family Investment Company, and how can it help families grow and protect their wealth? Let’s break it down.

What is a Family Investment Company (FIC)?

A Family Investment Company is simply a private company set up to hold and manage family wealth. Instead of gifting money or investments outright to the next generation, parents or grandparents establish a company and transfer assets into it, often holding different classes of shares to maintain control.

Think of it like this:

Imagine James and Sarah have £2 million in investments. They don’t want to hand it straight to their children, Ben and Emily, because they’re still young. Instead, they set up a FIC and transfer the investments into it. James and Sarah retain voting control as directors, while Ben and Emily become shareholders who will benefit from the company’s growth over time.

This structure allows the wealth to grow tax-efficiently, protects assets, and ensures control stays within the family.

Why Use a FIC?

There are four key reasons why FICs are becoming so popular:

1. Inheritance Tax (IHT) Benefits

Transferring shares in a FIC to the next generation early can help reduce exposure to inheritance tax (IHT).

Example:

• Sarah sets up a FIC and gifts shares worth £500,000 to her children.
• As long as she survives for seven years, this amount will be outside her estate for IHT purposes.
• Meanwhile, Sarah remains a director and retains control over how profits are distributed.

Because shares in private companies often qualify for minority discounts, their taxable value is typically lower than their actual worth — helping to further reduce IHT.

2. Tax Efficiency

FICs pay corporation tax (currently 25%) instead of the higher income tax rates individuals face. Dividends received from investments are also usually tax-free at the corporate level.

For example:

• An individual receiving £100,000 in investment income could pay up to 45% tax.
• A FIC, on the other hand, would pay corporation tax on trading profits but not on most dividends it receives.

This allows for wealth to grow at a lower tax rate before it is distributed to shareholders.

3. Keeping Control

Unlike trusts, where assets are handed over to trustees, FICs allow parents to stay in charge.

Example:

• Alex and Lisa set up a FIC and give their children 60% of the shares.
• However, Alex and Lisa retain voting shares, meaning they decide on when and how dividends are paid.
• Their children will benefit over time but can’t make major decisions without their parents’ approval.

This ensures that wealth isn’t mismanaged or spent recklessly by younger generations.

4. Asset Protection

A well-structured FIC can provide protection from divorce, bankruptcy, or reckless spending.

Example:

• If Lucy owns shares directly and gets divorced, her spouse could make a claim.
• If those shares are held within a FIC, and subject to restrictions on transfer, it becomes much harder for an ex-spouse to force a sale.

FICs can be structured with shareholder agreements and pre-marital agreements to limit ownership changes outside the family.

How Do You Fund a FIC?

Funding a FIC is typically done in three ways:

1. Cash Contributions — Parents subscribe for shares in the company or lend money to it.
2. Transferring Investments — Instead of cash, parents can sell properties or shares to the FIC.
3. Loans to the FIC — Instead of gifting wealth, parents can loan funds to the FIC and repay themselves over time.

Example:

• Richard owns a rental property worth £1 million.
• He sells it to his FIC in exchange for a £1 million loan account.
• Over time, the rental income is used to repay Richard, helping him manage his tax position.

Potential Pitfalls to Watch Out For

While FICs offer many benefits, they aren’t a one-size-fits-all solution. There are some tax and legal issues to keep in mind:

1. Double Taxation

When profits are eventually distributed to shareholders, they will be taxed again as dividends. However, careful planning (e.g., using loans or holding investments that generate tax-free returns) can help mitigate this.

2. Transactions in Securities (TiS) Rules

If HMRC believes a FIC is set up purely for tax avoidance, it could apply anti-avoidance rules. Ensuring there’s a commercial reason for the structure is crucial.

3. Settlements Legislation

If shares are structured incorrectly (e.g., giving different classes to spouses to lower tax), HMRC could apply anti-avoidance rules, potentially leading to higher tax bills.

Should You Set Up a FIC?

A FIC is an excellent long-term wealth planning tool, particularly for families with significant assets. It works well if:

✔️ You want inheritance tax savings but still want control.
✔️ You want to grow investments in a tax-efficient way.
✔️ You want to protect wealth from divorce, creditors, or poor decisions.

However, they are not for everyone — especially if the goal is to access income regularly or if the assets are relatively small.

Final Thoughts

Family Investment Companies offer a flexible, tax-efficient, and secure way to manage and pass on family wealth. While they do require careful structuring and compliance, they can be a great alternative to trusts, especially for high-net-worth families.